When will interest rates come down – and what does this mean for merchants?

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2024 started off with the grim announcement that the UK was officially entering a recession. Good times. Now, inflation is falling and could even hit the central bank’s target of 2% by spring. Did this joyful news mean the Bank of England decided to finally cut us all a break and lower the base interest rate from 5.25%? As of writing this – no. 


But the Bank of England has hinted that should inflation fall to or below target by the end of 2024, it will look at lowering the base rate in 2025. This could mean that the economy will start bouncing back sooner as consumer confidence slowly increases.  


So, are we still in a recession or not? 


Consumer spending is recovering. British retail sales jumped by the biggest margin in nearly three years in January 2024. But that number is still down from previous years, suggesting there’s a way to go.  


For many, an official decision by the Bank of England to lower base rates would indicate that things are on the up. But the Bank still has concerns, one of which is the wage-price spiral. This refers to the current struggle facing many UK merchants to fill vacant roles. Employees are asking for higher wages that reflect increasing costs. To fund these wages, merchants must then hike their prices. And there you have it – the wage-price spiral.  


So how do they plan to tackle this issue? Merchants can hardly stop trying to fill roles, and employees aren’t going to stop looking for a wage that reflects the cost of living anytime soon.


This leaves the option of hiking interest rates, which makes borrowing more expensive for everyone. Consumers will spend less, and eventually prices will need to drop to incentive them. Prices drop, and the need for mega-high wages can relax a little.  


In theory, this seems to be working. One way or another, inflation is dropping, and if it meets the government’s current target by the end of the year, a recession is likely to be short-lived.  


What does this mean for retail in 2024? 


According to leading business consultancy RSM, 2024 looks set to be a tale of two halves for retail.


‘The end of 2023 saw the trend for quantities of goods purchased decline, down by 2.8% on an annual basis,’ A recent article states, ‘From this we expect the stagnation of sales to continue for the first half of 2024 whilst consumers continue to grapple with higher prices and interest rates.’ RSM reports that its survey shows 92% of consumers say higher prices will impact non-essential spending in the next 12 months, and 78% say the same for high interest rates. 


In summary: H1 of 2024 is going to be a rocky ride for merchants. But will the outlook improve in H2? 


Inflation is on track to hit the Bank of England’s 2% target rate in the second half of 2024, and lenders are likely to drop interest rates from summer on. This, coupled with the tax cuts announced at March’s Spring Budget, means H2 of 2024 should look a bit rosier for merchants and consumers.  


One thing is clear: customers will still be looking for ways to cut costs where possible- whether through bargain-hunting, or through spreading the cost of purchases.  


How can retail finance help my business?


Interest free finance is the most popular option among online shoppers. But for higher-ticket items spread across longer periods, many are happy to fork out for interest bearing finance too. Merchants who can offer both retail finance options at checkout are arguably at a competitive advantage in the current climate.


Our own stats show that UK merchants using our finance solution, DivideBuy, have increased sales by 25%. They’ve also lowered their cost per acquisition (the marketing spend it takes to acquire a customer) by 36%.


What has this got to with retail trends for 2024?


A recent whitepaper by NatWest shows that 27% of UK consumers used retail finance options to spread the cost last year. And with more of us keeping our cash in our pockets, that number only looks set to rise.


If you’re considering retail finance for eCommerce, or are looking for a new provider to help boost basket value, book a demo with us today.  


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Please note, a minimum turnover of £2.5M and minimum trading period of 24 months is required to offer DivideBuy finance solutions.

Please note, a minimum turnover of £2.5M and minimum trading of 24 months is required to work with DivideBuy.


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